Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and related notes. This discussion
contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated due to various factors discussed under "Forward-Looking
Statements" and elsewhere in this Annual Report on Form 10-K, including the "Risk Factors" described in Item 1A.
A. Our Business
Analysts
International Corporation ("AIC," "Company," "we," "us," or "our") is a national information technology ("IT") services company. We employ approximately 900 IT professionals,
management and administrative staff and are focused on serving the IT needs of mid-market to Fortune 500 companies and government agencies across North America. AIC was incorporated in
Minnesota in 1966 and our corporate headquarters is located in Minneapolis, Minnesota.
B. Review of Fiscal 2012 Strategic Plan
In
fiscal 2012, our plan was to continue our focus on investing for growth in our business while delivering profitability. Our plan
included:
-
-
Leveraging our fiscal 2011 investments in sales and recruiting personnel and continuing to invest in our core markets with
the highest potential for growth;
-
-
Leveraging strategic client relationships and expanding our national sales capabilities; and
-
-
Continuing to grow our consultant community with a focus on higher IT skill sets.
AIC
has a long history of serving mid-market to Fortune 500 companies throughout the country. In fiscal 2011, we expanded our sales and recruiting team in our core markets
and began to realize the return on these investments. In 2012, we made additional investments in our national sales organization. With a renewed focus on providing IT services to our national clients
with multiple buying locations around the country, we expanded our presence within these clients in 2012. However, our loss of revenues in certain markets we exited and from declines in certain large
clients year-over-year more than offset these gains, resulting in a decline in revenues in fiscal year 2012 compared to fiscal year 2011. We expect the investments that were
made in fiscal 2011 and 2012 to drive growth in fiscal 2013, and we anticipate continued profitability for fiscal 2013.
C. Business Developments
Change in Leadership
On December 18, 2009, our Board of Directors appointed Andrew K. Borgstrom as President and Chief Executive Officer. On
September 28, 2010, Mr. Borgstrom resigned as President, Chief Executive Officer and a Director of our Company. Under a transitional services
agreement, Mr. Borgstrom was available to assist AIC with ongoing business initiatives through January 31, 2011. On September 29, 2010, our Board of Directors appointed Brittany
B. McKinney as our Interim President and Chief Executive Officer.
On
February 22, 2011, our Board of Directors appointed Ms. McKinney as our President and Chief Executive Officer and on May 24, 2011, she was elected as a Director
of our Company. Previously, Ms. McKinney was our Vice President of Corporate Development and the Senior Vice President of the Central Region.
On
May 4, 2011, Randy W. Strobel resigned from his employment as the Company's Senior Vice President, Chief Financial Officer effective on August 31, 2011. On
August 3, 2011, Mr. Strobel
12
Table of Contents
resigned
from his position as the Company's Senior Vice President, Chief Financial Officer effective as of August 5, 2011; however, Mr. Strobel remained an employee through
August 31, 2011.
On
August 3, 2011, the Company and William R. Wolff entered into an Employment Agreement with an effective date of August 8, 2011, which provided that Mr. Wolff
would be employed as Senior Vice President, Chief Financial Officer of the Company. On June 12, 2012, Mr. Wolff resigned from his employment as Senior Vice President, Chief Financial
Officer of the Company, effective June 29, 2012.
On
June 8, 2012, the Company and Lynn L. Blake entered into an Employment Agreement with an effective date of July 2, 2012, which provided that Ms. Blake would be
employed as Senior Vice President, Chief Financial Officer and Treasurer of the Company. For the past five years, Ms. Blake had served as the Vice President of Finance and Chief Accounting
Officer at Entegris, Inc., a publicly traded global provider of products and materials used in advanced high-technology manufacturing.
Enterprise Resource Planning ("ERP") Solution
On August 18, 2011, our Board of Directors approved a project to replace our financial and human resource information systems
with a fully integrated ERP system. The initial implementation of the ERP system was completed in early fiscal 2012 and resulted in approximately
$1.5 million of costs being capitalized in fiscal 2011. Through the end of fiscal 2012, we capitalized additional costs related to the ERP system of approximately $0.7 million. The ERP
system has allowed us to streamline our business processes and attain cost efficient scalability as well as improve management reporting and analysis.
Revolving Credit Facility
On February 23, 2011, we entered into the First Amendment to the Credit and Security Agreement ("Amended Credit Facility") with
Wells Fargo Bank, National Association ("Wells Fargo"), which amended the terms of the credit facility and extended the maturity date to September 30, 2014. Under the Amended Credit Facility,
Wells Fargo will continue to advance up to $15.0 million to us for working capital purposes and to facilitate the issuance of letters of credit.
On
September 21, 2011, we entered into the Second Amendment to the Amended Credit Facility with Wells Fargo, which increased our annual capital expenditures covenant for fiscal
2011 from $2.0 million to $2.5 million.
On
February 22, 2012, we entered into the Third Amendment to the Amended Credit Facility ("Third Amendment") with Wells Fargo. The Third Amendment increased the total availability
of the Amended Credit Facility, which fluctuates based on our level of eligible accounts receivable, by approximately $4.0 million. In addition, the Third Amendment increased our minimum
trailing twelve months earnings before taxes financial covenant from a loss of $0.8 million to earnings of $0.25 million. Finally, the Third Amendment added an additional financial
covenant which will require us to maintain a minimum excess borrowing base availability of not less than $3.0 million for each reporting period in fiscal 2012 and thereafter.
On
February 20, 2013, we entered into the Fourth Amendment to the Amended Credit Facility ("Fourth Amendment") with Wells Fargo. The Fourth Amendment adjusted certain collateral
borrowing base calculations associated with our eligible unbilled accounts receivable and is expected to increase our borrowing availability in periods in which our fiscal period ends prior to the
calendar month end, which affects our unbilled accounts receivable levels for clients on a calendar month billing cycle. In addition, the Fourth Amendment extended the term of the Amended Credit
Facility from September 30, 2014 to September 30, 2016. Finally, the Fourth Amendment adjusted our minimum trailing twelve months earnings before taxes financial covenant to a loss of
$0.1 million for the period ending March 30, 2013, a loss of $0.3 million for the period ending June 29, 2013 and earnings of
13
Table of Contents
$0.25 million
for periods thereafter through the expiration of the credit agreement ending on September 30, 2016.
Under
the Amended Credit Facility, Wells Fargo will continue to advance up to $15.0 million to us for working capital purposes and to facilitate the issuance of letters of credit.
Restructuring Costs and Other Severance Related Costs
For fiscal 2012, we recorded severance charges of $0.1 million related to changes in our senior executive officers.
For
fiscal 2011, we recorded severance and office closure charges totaling $0.8 million. Of these charges, $0.4 million related to severance and $0.4 million related
to relocation of our corporate headquarters.
For
fiscal 2010, we recorded a net reversal of restructuring costs and other severance-related costs of $0.3 million. The net reversal is comprised of a $0.4 million charge
relating to severance and other severance-related expenses and a reversal of $0.7 million primarily relating to the modification of lease agreements for office space previously vacated.
D. Overview of Fiscal 2012 Results
During
fiscal 2012, we continued to invest in our core regional markets that have a high potential for growth, began to leverage strategic client relationships to expand a national sales
strategy and focused attention on placing consultants with clients that demand higher-end IT services.
For
fiscal 2012, our revenues decreased $3.3 million, or 3.0%, from fiscal 2011. When compared to the prior year, the number of billable hours decreased 2.0% and our average
billing rates were down by 1.2%. The number of billing days in fiscal 2012 and fiscal 2011 was 253 and 254, respectively.
The
gross margin rate decreased 180 basis points from 24.2% in fiscal 2011 to 22.4% for fiscal 2012 primarily due to increased benefit costs (primarily the cost of our
self-insured medical plan benefits) and lower consultant utilization in the latter half of fiscal 2012.
Selling
General and Administrative ("SG&A") expenses increased $1.0 million, or 4.3%, in fiscal 2012 over fiscal 2011 as a result of an increase in sales and recruiter personnel
expenses and bad debt expense, offset by decreases in our management incentives and stock based compensation. The prior year included the final earn-out benefit of $0.3 million
associated with a sale of business in fiscal 2008 and $0.4 million in reversals of post-retirement medical plan liabilities.
We
generated $1.6 million of cash from operations during fiscal 2012. As of December 29, 2012, we had a cash balance of $5.8 million and no outstanding borrowings
under our revolving line of credit.
14
Table of Contents
RESULTS OF OPERATIONS FOR FISCAL 2012 AS COMPARED TO YEAR 2011
The following table illustrates the relationship between revenue and expense categories for fiscal 2012 versus fiscal 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
Fiscal 2012
|
|
Year Ended
Fiscal 2011
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
% of
Revenue
|
|
|
|
% of
Revenue
|
|
(Dollars in thousands)
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
Revenues
|
|
$
|
105,790
|
|
|
100.0
|
%
|
$
|
109,118
|
|
|
100.0
|
%
|
$
|
(3,328
|
)
|
|
(3.0
|
)%
|
Cost of revenues
|
|
|
82,047
|
|
|
77.6
|
|
|
82,734
|
|
|
75.8
|
|
|
(687
|
)
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
23,743
|
|
|
22.4
|
|
|
26,384
|
|
|
24.2
|
|
|
(2,641
|
)
|
|
(10.0
|
)
|
Selling, administrative and other operating costs
|
|
|
23,229
|
|
|
22.0
|
|
|
22,279
|
|
|
20.4
|
|
|
950
|
|
|
4.3
|
|
Restructuring costs and other severance related costs
|
|
|
113
|
|
|
0.1
|
|
|
769
|
|
|
0.7
|
|
|
(656
|
)
|
|
(85.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
23,342
|
|
|
22.1
|
|
|
23,048
|
|
|
21.1
|
|
|
294
|
|
|
1.3
|
|
Operating income
|
|
|
401
|
|
|
0.4
|
|
|
3,336
|
|
|
3.1
|
|
|
(2,935
|
)
|
|
(88.0
|
)
|
Non-operating income
|
|
|
|
|
|
0.0
|
|
|
|
|
|
0.0
|
|
|
|
|
|
NM
|
|
Interest expense
|
|
|
(3
|
)
|
|
(0.0
|
)
|
|
|
|
|
0.0
|
|
|
3
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
398
|
|
|
0.4
|
|
|
3,336
|
|
|
3.1
|
|
|
(2,938
|
)
|
|
(88.1
|
)
|
Income tax expense
|
|
|
68
|
|
|
0.1
|
|
|
42
|
|
|
0.1
|
|
|
26
|
|
|
61.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (comprehensive income)
|
|
$
|
330
|
|
|
0.3
|
%
|
$
|
3,294
|
|
|
3.0
|
%
|
$
|
(2,964
|
)
|
|
(90.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Our revenues for fiscal 2012 decreased $3.3 million, or 3.0%, from fiscal 2011. The decrease in our fiscal 2012 revenue over the
prior year is primarily due to a 2.0% ($2.2 million) decrease in the number of hours billed, a 1.2% ($1.2 million) decrease in our average billing rate and an increase of
$0.1 million in other revenues. There were 253 and 254 billing days in fiscal 2012 and fiscal 2011, respectively.
Cost of Revenues
Cost of revenues represents our payroll and benefit costs associated with our billable consultants and our cost of using
subcontractors. This category of expense as a percentage of revenues increased 180 basis points from 75.8% to 77.6%, in fiscal 2012 compared to fiscal 2011. The increase in cost as a percentage of
revenue from the prior year is primarily due to an increase in our benefit cost of $1.1 million (primarily the cost of our self-insured medical plan benefits).
Selling, Administrative and Other Operating Costs
SG&A costs include management and administrative salaries, salaries and commissions paid to account executives and recruiters,
benefits, location costs and other administrative costs. This category of costs increased approximately $1.0 million in fiscal 2012 from fiscal 2011 and represented 22.0% of revenue in fiscal
2012 as compared to 20.4% in fiscal 2011. In fiscal 2012, SG&A expenses increased as a result of an increase in sales and recruiter personnel expenses ($0.6 million) and increased bad debt
expense ($0.2 million), offset by decreases in management incentives and stock based compensation of
15
Table of Contents
$0.5 million.
Additionally, the increase in SG&A expense in fiscal 2012 compared to fiscal 2011 was also the result of certain reductions in expense in fiscal 2011 that did not repeat in fiscal
2012. These items included a final earn-out benefit of $0.3 million associated with a sale of business in fiscal 2008 and a reduction in our post-retirement medical benefits by requiring
participants in our plan to move to a standardized plan or accept a buyout, which resulted in a decline in our future benefit obligation of $0.4 million in fiscal 2011.
Restructuring Costs and Other Severance Related Costs
During fiscal 2012, we recorded severance charges of $0.1 million related to changes in our senior executive officers.
During
fiscal 2011, we recorded severance and office closure charges of $0.8 million. Of these charges, $0.4 million related to severance and severance-related charges for
changes in our senior executive officers and $0.4 million related to the relocation of our corporate headquarters.
Interest Expense
The implementation of the ERP system at the beginning of fiscal 2012 caused a delay in our normal billing cycles during the first few
months of fiscal 2012 which caused an increase in our operating working capital. As a result, we borrowed and repaid $5.0 million on our Amended Credit Facility during the first half of fiscal
2012. We had no borrowings during the second half of fiscal 2012 and had no amounts outstanding at December 29, 2012. Our average borrowings for fiscal 2012 were approximately $49,000. We had
no borrowings during fiscal 2011.
Income Taxes
For fiscal 2012 and 2011, we recorded a provision for income taxes for amounts due for certain state income taxes and changes in our
reserves for tax obligations. Our income tax expense reflects the utilization of net operating loss carry-forwards to offset taxable income. We currently have approximately $24.9 million of tax
benefits associated with operating loss carry-forwards available to offset federal and state taxes. We recorded no additional income tax expense or benefit associated with our net operating income or
loss because any tax expense or benefit that would otherwise have been recorded has been negated by adjusting the valuation allowance against our deferred tax asset. If, however, we maintain sustained
future profitability and return to a point where future realization of deferred tax assets, which have a full valuation allowance, become "more likely than not," we may be required to reverse the
existing valuation allowance associated with these assets.
Certain Information Concerning Off-Balance Sheet Arrangements
As of December 29, 2012, we did not have any relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. We are, therefore, not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
16
Table of Contents
RESULTS OF OPERATIONS FOR FISCAL 2011 AS COMPARED TO FISCAL 2010
The following table illustrates the relationship between revenue and expense categories for fiscal 2011 versus fiscal 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
Fiscal 2011
|
|
Year Ended
Fiscal 2010
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
% of
Revenue
|
|
|
|
% of
Revenue
|
|
(Dollars in thousands)
|
|
Amount
|
|
Amount
|
|
Amount
|
|
%
|
|
Revenues
|
|
$
|
109,118
|
|
|
100.0
|
%
|
$
|
106,688
|
|
|
100.0
|
%
|
$
|
2,430
|
|
|
2.3
|
%
|
Cost of revenues
|
|
|
82,734
|
|
|
75.8
|
|
|
82,911
|
|
|
77.7
|
|
|
(177
|
)
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
26,384
|
|
|
24.2
|
|
|
23,777
|
|
|
22.3
|
|
|
2,607
|
|
|
11.0
|
|
Selling, administrative and other operating costs
|
|
|
22,279
|
|
|
20.4
|
|
|
24,554
|
|
|
23.0
|
|
|
(2,275
|
)
|
|
(9.3
|
)
|
Restructuring costs and other severance related costs
|
|
|
769
|
|
|
0.7
|
|
|
(300
|
)
|
|
(0.3
|
)
|
|
1,069
|
|
|
356.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
23,048
|
|
|
21.1
|
|
|
24,254
|
|
|
22.7
|
|
|
(1,206
|
)
|
|
(5.0
|
)
|
Operating income
|
|
|
3,336
|
|
|
3.1
|
|
|
(477
|
)
|
|
(0.4
|
)
|
|
3,813
|
|
|
799.4
|
|
Non-operating income
|
|
|
|
|
|
0.0
|
|
|
14
|
|
|
0.0
|
|
|
(14
|
)
|
|
NM
|
|
Interest expense
|
|
|
|
|
|
0.0
|
|
|
(13
|
)
|
|
(0.0
|
)
|
|
(13
|
)
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3,336
|
|
|
3.1
|
|
|
(476
|
)
|
|
(0.4
|
)
|
|
3,812
|
|
|
800.8
|
|
Income tax expense
|
|
|
42
|
|
|
0.1
|
|
|
4
|
|
|
0.0
|
|
|
38
|
|
|
950.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (comprehensive income (loss))
|
|
$
|
3,294
|
|
|
3.0
|
%
|
$
|
(480
|
)
|
|
(0.4
|
)%
|
$
|
3,774
|
|
|
786.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Our revenues for fiscal 2011 increased $2.4 million, or 2.3%, from fiscal 2010. The increase in our fiscal 2011 revenues over
fiscal 2010 is primarily due an increase in our average billing rates of 2.5%, which resulted in approximately $2.2 million of additional revenues, and a slight increase in the number of hours
billed, which resulted in approximately $0.2 million in additional revenues.
Cost of Revenues
Cost of revenues represents our payroll and benefit costs associated with our billable consultants and our cost of using
subcontractors. This category of expense as a percentage of revenues decreased 190 basis points from 77.7% to 75.8%, in fiscal 2011 compared to fiscal 2010 primarily due to our strategy of evolving
our mix of business.
Selling, Administrative and Other Operating Costs
SG&A costs include management and administrative salaries, salaries and commissions paid to account executives and recruiters,
benefits, location costs and other administrative costs. This category of costs decreased approximately $2.3 million in fiscal 2011 from fiscal 2010 and represented 20.4% of revenue in fiscal
2011 as compared to 23.0% in fiscal 2010. In fiscal 2011, SG&A expenses declined as a result of previously implemented general expense reductions ($1.4 million), lower employee benefit costs
($0.9 million) and personnel and related cost reductions ($0.1 million), which was partially offset by higher sales and recruiting costs ($0.5 million). In addition, during fiscal
2011, we required the
17
Table of Contents
participants
in our post-retirement medical benefit plan to move to a standardized plan or accept a buyout, which resulted in a decline in our future benefit obligation of
$0.4 million.
Restructuring Costs and Other Severance Related Costs
During fiscal 2011, we recorded severance and office closure charges of $0.8 million. Of these charges, $0.4 million
related to severance and severance-related charges for changes in our senior executive officers and $0.4 million related to the relocation of our corporate headquarters.
During
fiscal 2010, we recorded a net reversal of restructuring costs and other severance-related costs of $0.3 million. The net reversal is comprised of a $0.4 million
charge relating to severance and severance-related expenses and a reversal of $0.7 million, primarily relating to the modification of lease agreements for office space previously vacated.
Non-operating Income
We had no Non-operating income during fiscal 2011.
Interest Expense
We had no borrowings outstanding at any time during fiscal 2011 or 2010 under our revolving credit facility.
Income Taxes
For fiscal 2011 and 2010, we recorded a provision for income taxes for amounts due for certain state income taxes and changes in our
reserves for tax obligations. Our income tax expense reflects the utilization of net operating loss carry-forwards to offset taxable income. We had approximately $25.4 million of tax benefits
associated with operating loss carry-forwards available to offset federal and state taxes. We recorded no additional income tax expense or benefit associated with our net operating income or loss
because any tax expense or benefit that would otherwise have been recorded has been negated by adjusting the valuation allowance against our deferred tax assets.
Certain Information Concerning Off-Balance Sheet Arrangements
As of December 31, 2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. We are, therefore, not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Liquidity and Capital Resources
At December 29, 2012, we had $5.8 million of cash and cash equivalents on hand. In addition to our cash balances, we have
access to our Amended Credit Facility with $15.0 million of maximum availability, under which our borrowing availability was $10.9 million as of December 29, 2012. Working capital
was $16.9 million at December 29, 2012, up approximately $0.7 million from December 31, 2011. The ratio of current assets to current liabilities increased to 4.19 at
December 29, 2012 compared to 3.17 at December 31, 2011.
Historically,
we have been able to support internal growth in our business with internally generated funds and through the use of our credit facility. We believe our existing working
capital and availability under our Amended Credit Facility with Wells Fargo will be sufficient to support the cash flow needs of our business. We expect to be able to comply with the requirements of
our credit agreement; however,
18
Table of Contents
failure
to do so could affect our ability to obtain necessary working capital and could have a material adverse effect on our business.
The
following table summarizes the major captions from our Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
(In thousands)
|
|
December 29,
2012
|
|
December 31,
2011
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
1,552
|
|
$
|
2,435
|
|
Net cash used in investing activities
|
|
|
(936
|
)
|
|
(1,121
|
)
|
Net cash provided by (used in) financing activities
|
|
|
41
|
|
|
(507
|
)
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
657
|
|
$
|
807
|
|
|
|
|
|
|
|
Cash provided by operating activities was $1.6 million and $2.4 million for fiscal years 2012 and 2011, respectively.
The
elements of cash provided by operations for the fiscal year ending December 29, 2012 were as follows: a decrease in operating working capital of approximately
$0.2 million, net income of $0.3 million and non-cash charges to our net income of $1.1 million.
The
major components of the $0.2 million decrease in operating working capital during fiscal 2012 were due to lower Accounts receivable ($1.9 million) and Prepaid Expenses
and Other Assets ($0.3 million) offset by reductions of several liability accounts totaling $2.0 million. We generated $1.9 million of cash by reducing our accounts receivable
balance 10.7% from the prior year. The decrease in accounts receivable from the end of fiscal 2011 is primarily due to a 6.0% decrease in our fiscal 2012 fourth quarter revenues over the fourth
quarter of fiscal 2011. Our days sales outstanding at the end of fiscal 2012 was 62 compared to 61 at the end of fiscal 2011. The reductions of various liabilities on our balance sheets totaling
$2.0 million during fiscal 2012 were primarily due to lower business volumes ($1.1 million), a reduction in payment terms for certain subsupplier vendors ($0.4 million) and making
final payments on our restructuring liabilities ($0.5 million).
In
fiscal 2011, the elements of cash provided by operating activities were as follows: net income of $3.3 million and non-cash charges to our net income of
$1.1 million partially offset by a $2.0 million increase in operating working capital.
Cash used in investing activities was $0.9 million and $1.1 million for the fiscal years 2012 and 2011, respectively.
In
fiscal 2012, we made capital expenditures of $1.1 million, the majority of which ($1.0 million) related to enhancements to the ERP system that we first implemented in
early fiscal 2012, offset by the liquidation of a trust investment of $0.2 million during the third quarter of fiscal 2012. In fiscal 2011, we made capital expenditures of $1.6 million
which were offset by proceeds of a cash surrender of a life insurance policy of $0.5 million.
Cash provided by financing activities for the fiscal year 2012 was $41,000 compared to cash used in financing activities of
$0.5 million for fiscal year 2011.
19
Table of Contents
In
fiscal 2012, we borrowed and repaid $5.0 million on our Amended Credit Facility. Our average borrowings for fiscal 2012 were approximately $49,000.
During
fiscal 2011, we paid off a loan on a Company-owned life insurance policy of approximately $0.5 million. The Company-owned life insurance policy was previously reported in
Other Assets in our Consolidated Balance Sheets.
On
February 20, 2013, we entered into the Fourth Amendment to the Amended Credit Facility ("Fourth Amendment") with Wells Fargo. The Fourth Amendment adjusted certain collateral
borrowing base calculations associated with our eligible unbilled accounts receivable and is expected to increase our borrowing availability in periods in which our fiscal period ends prior to the
calendar month end, which affects our unbilled accounts receivable levels for clients on a calendar month billing cycle. In addition, the Fourth Amendment extended the term of the Amended Credit
Facility from September 30, 2014 to September 30, 2016. Finally, the Fourth Amendment adjusted our minimum trailing twelve months earnings before taxes financial covenant to a loss of
$0.1 million for the period ending March 30, 2013, a loss of $0.3 million for the period ending June 29, 2013 and earnings of $0.25 million for periods thereafter
through the expiration of the credit agreement ending on September 30, 2016.
Under
the Amended Credit Facility, Wells Fargo will continue to advance up to $15.0 million to us for working capital purposes and to facilitate the issuance of letters of credit.
The total amount available for borrowing under the Amended Credit Facility will fluctuate based on our level of eligible accounts receivable.
The
Amended Credit Facility carries an interest rate equal to the three-month LIBOR rate plus 1.50% - 2.50%, depending on our operating results. The credit facility had a
one-time origination fee of $150,000, the balance of which is being amortized over the new term of the Amended Credit Facility. The annual unused line fee varies between 0.25% - 0.375%,
depending on our operating results, on the daily average unused amount. The interest rate effective at the end of fiscal year 2012 was 2.375% and the unused line fee rate was 0.25%. The maturity date
of the Amended Credit Facility is September 30, 2016 and may be terminated or reduced by us on 90 days notice in exchange for a termination fee of 0.25% of the maximum line amount or
reduction of the maximum line amount through September 30, 2015 and no fee in the final year of the agreement ending on September 30, 2016. Borrowings under the Amended Credit Facility
are secured by all of our assets.
The
Amended Credit Facility limits our annual capital expenditures to $2.0 million. For 2012 and thereafter, we will also be required to maintain a minimum excess borrowing base
availability of not
less than $3.0 million. The Amended Credit Facility contains customary affirmative covenants, including covenants regarding annual, quarterly and projected financial reporting requirements,
collateral and insurance maintenance, and compliance with applicable laws and regulations. Further, the facility contains customary negative covenants limiting our ability to grant liens, incur
indebtedness, make investments, repurchase our stock, create new subsidiaries, sell assets or engage in any change of control transaction without the consent of Wells Fargo.
Upon
an event of default, Wells Fargo may terminate the facility or declare the entire amount outstanding under the facility to be immediately due and payable and exercise other rights
under the agreement. The events of default under the facility include, among other things, payment defaults, breaches of covenants, a change in control and bankruptcy events.
As
of December 29, 2012, we were in compliance with all the requirements and had no outstanding borrowings under the Amended Credit Facility. Total availability under the Amended
Credit Facility, which fluctuates based on our level of eligible accounts receivable, was $10.9 million as of December 29, 2012.
20
Table of Contents
Contractual Obligations
We have entered into arrangements that represent certain commitments and have arrangements with certain contingencies. We lease office
facilities under non-cancelable operating leases and have deferred compensation that is payable to participants in accordance with the terms of our Restated Special Executive Retirement
Plan and other agreements. We incur interest expense on our deferred compensation obligation. Minimum future obligations on operating leases (net of sublease contracts) and deferred compensation as of
December 29, 2012, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
1 Year
|
|
2 - 3 Years
|
|
4 - 5 Years
|
|
Over 5
Years
|
|
Total
|
|
Operating leases
|
|
$
|
1,140
|
|
$
|
1,989
|
|
$
|
1,610
|
|
$
|
3,093
|
|
$
|
7,832
|
|
Deferred compensation
|
|
|
62
|
|
|
96
|
|
|
71
|
|
|
103
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,202
|
|
$
|
2,085
|
|
$
|
1,681
|
|
$
|
3,196
|
|
$
|
8,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical Accounting Estimates & Policies
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual
results may differ from these estimates under different assumptions or conditions. We believe the estimates described below are the most sensitive estimates made by management in the preparation of
the financial statements.
Critical
accounting policies are defined as those that involve significant judgments and uncertainties or affect significant line items within our financial statements and potentially
result in materially different outcomes under different assumptions and conditions. Application of these policies is particularly important to the portrayal of our financial condition and results of
operations. We believe the accounting policies described below meet these characteristics.
Allowance for Doubtful Accounts
In each reporting period, we determine the reserve for uncollectible accounts. An evaluation of the risk associated with a client's
ability to make contractually required payments is used to determine this reserve. These determinations require considerable judgment in assessing the ultimate potential for collection of these
receivables and include reviewing the financial stability of the client, the client's ability to pay and current market conditions. If our evaluation of a client's ability to pay is incorrect, we may
incur future charges.
Revenue Recognition Policy
We generally recognize revenue as hours are worked and costs are expended. This includes Staff Augmentation, Managed Teams and
Project-Based Solutions services that are billed on an hourly basis, which is the majority of our revenue.
We
periodically enter into fixed price engagements. When we enter into such an engagement, revenue is recognized over the life of the contract based on time and materials input to date
and the estimate
of time and materials to complete the project. This method of revenue recognition relies on accurate estimates of the cost, scope, and duration of the engagement. If we do not accurately estimate the
resources required or the scope of the work to be performed, both prior and future revenues may
21
Table of Contents
be
negatively affected or losses on contracts may need to be recognized. All future anticipated losses are recognized in the period they are identified.
In
some cases, we provide permanent placement services for clients for a fee. When we provide such services, revenue is recognized when the candidate commences in the position.
Income Taxes
We file a consolidated income tax return in the US federal jurisdiction. We also file consolidated or separate company income
tax returns in most states, Canada federal and Ontario province. As of December 29, 2012, there was one state tax audit in progress. The financial assessment is not yet final; however, we
estimate the financial impact to be approximately $10,000 and it is provided for in our uncertain tax positions as of December 29, 2012. Aside from the aforementioned, there are no other
federal, state or foreign income tax audits in progress. We are no longer subject to US federal audits for tax years before 2009, and with few exceptions, the same for state and local audits.
In
accordance with FASB ASC Topic 740,
Income Taxes
("ASC 740"), we account for income taxes under the asset and liability method, which
requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax
assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse.
We
record a valuation allowance to reduce our deferred tax assets to an amount we believe will more likely than not be realized. The Financial Accounting Standards Board guidance
requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence that can be objectively
verified. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, historical and projected future taxable
income, tax planning strategies and recent
financial operations. Our three-year historical cumulative loss has been a significant negative factor in recent fiscal years in determining that a valuation allowance on these assets
continued to be appropriate.
As
of December 29, 2012, the Company was no longer in a three-year cumulative loss position. However, the realization of tax benefits of deductible temporary
differences and operating loss or tax credit carry-forwards will depend on whether we have sufficient taxable income of an appropriate character within the carry-back and carry-forward
periods permitted by the tax law to allow for utilization of the deductible amounts and carry-forwards. Significant management judgment is required in determining if a valuation allowance should
continue to be recorded against deferred tax assets. We evaluated our ability to recover the deferred tax assets and weighed all available positive and negative evidence based on its objectivity and
subjectivity. Such evidence included the lack of long-term, sustained positive operating results and trends, our ability to carry back losses against prior taxable income and uncertainty around
projections of future taxable income. In estimating future taxable income, we developed assumptions including the amount of future federal and state pre-tax operating income and the
reversal of temporary differences. These plans and projections require us to make estimates about a number of factors, including future revenues, prices, inflation, and expenses. Giving consideration
to all relevant facts and circumstances, we concluded that the weight of the positive evidence was not sufficient to overcome the negative evidence and have concluded it is appropriate to maintain a
full valuation allowance of $26.0 million against our deferred tax assets.
In
the event we were to determine that we would be able to realize a portion, or all, of our deferred income tax assets in the future in excess of their net recorded amount, we would
make an adjustment to the valuation allowance, which could materially impact our financial position and results of operations.
22
Table of Contents
ASC
740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. ASC 740 also prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, ASC 740 provides guidance on
de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
We
account for our sales tax and any other taxes that are collected from our clients and remitted to governmental authorities on a net basis. The assessment, collection and payment of
these taxes are not reflected on our Consolidated Statement of Operations.
We
recognize interest and penalties related to uncertain tax positions within interest expense.
New Accounting Pronouncements and Interpretations
There have been no new accounting pronouncements issued or changes to existing pronouncements during the fiscal year ended
December 29, 2012 that would have a material impact on our financial results.
Item 8. Financial Statements and Supplementary Data.
23
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
(In thousands, except share and per share amounts)
|
|
December 29,
2012
|
|
December 31,
2011
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,792
|
|
$
|
5,135
|
|
Accounts receivable, less allowance for doubtful accounts of $671 and $644, respectively
|
|
|
16,095
|
|
|
18,016
|
|
Prepaid expenses and other current assets
|
|
|
281
|
|
|
489
|
|
|
|
|
|
|
|
Total current assets
|
|
|
22,168
|
|
|
23,640
|
|
Property and equipment, net of accumulated depreciation of $7,492 and $7,535, respectively
|
|
|
2,366
|
|
|
2,095
|
|
Other assets
|
|
|
185
|
|
|
457
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
24,719
|
|
$
|
26,192
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,651
|
|
$
|
3,847
|
|
Salaries and benefits
|
|
|
1,724
|
|
|
2,078
|
|
Deferred revenue
|
|
|
331
|
|
|
285
|
|
Deferred compensation
|
|
|
62
|
|
|
136
|
|
Restructuring accrual
|
|
|
|
|
|
442
|
|
Other current liabilities
|
|
|
529
|
|
|
664
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,297
|
|
|
7,452
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
270
|
|
|
379
|
|
Restructuring accrual
|
|
|
|
|
|
28
|
|
Other long-term liabilities
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
274
|
|
|
407
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
Common stock, par value $0.10 a share; authorized 24,000,000 shares; issued and outstanding 5,084,155 and 5,032,759, respectively
|
|
|
508
|
|
|
503
|
|
Additional capital
|
|
|
26,644
|
|
|
26,164
|
|
Accumulated deficit
|
|
|
(8,004
|
)
|
|
(8,334
|
)
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
19,148
|
|
|
18,333
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
24,719
|
|
$
|
26,192
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
24
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
(In thousands except per share amounts)
|
|
2012
|
|
2011
|
|
2010
|
|
Revenues
|
|
$
|
105,790
|
|
$
|
109,118
|
|
$
|
106,688
|
|
Cost of revenues
|
|
|
82,047
|
|
|
82,734
|
|
|
82,911
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
23,743
|
|
|
26,384
|
|
|
23,777
|
|
Selling, administrative and other operating costs
|
|
|
23,229
|
|
|
22,279
|
|
|
24,554
|
|
Restructuring costs and other severance related costs
|
|
|
113
|
|
|
769
|
|
|
(300
|
)
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
23,342
|
|
|
23,048
|
|
|
24,254
|
|
Operating income (loss)
|
|
|
401
|
|
|
3,336
|
|
|
(477
|
)
|
Non-operating income
|
|
|
|
|
|
|
|
|
14
|
|
Interest expense
|
|
|
(3
|
)
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
398
|
|
|
3,336
|
|
|
(476
|
)
|
Income tax expense
|
|
|
68
|
|
|
42
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Net income (loss) (comprehensive income (loss))
|
|
$
|
330
|
|
$
|
3,294
|
|
$
|
(480
|
)
|
|
|
|
|
|
|
|
|
Per common share (basic):
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.07
|
|
$
|
0.66
|
|
$
|
(0.10
|
)
|
Per common share (diluted):
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.06
|
|
$
|
0.66
|
|
$
|
(0.10
|
)
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,071
|
|
|
5,012
|
|
|
4,986
|
|
Diluted
|
|
|
5,102
|
|
|
5,027
|
|
|
4,986
|
|
See notes to consolidated financial statements.
25
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
(In thousands)
|
|
2012
|
|
2011
|
|
2010
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
330
|
|
$
|
3,294
|
|
$
|
(480
|
)
|
Adjustments to net income (loss):
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
646
|
|
|
632
|
|
|
860
|
|
Loss on sale or disposal of assets
|
|
|
|
|
|
|
|
|
167
|
|
Share based compensation
|
|
|
469
|
|
|
531
|
|
|
1
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,921
|
|
|
(591
|
)
|
|
5,603
|
|
Accounts payable
|
|
|
(957
|
)
|
|
(705
|
)
|
|
(2,726
|
)
|
Salaries and benefits
|
|
|
(379
|
)
|
|
(111
|
)
|
|
(309
|
)
|
Restructuring accrual
|
|
|
(470
|
)
|
|
(36
|
)
|
|
(2,577
|
)
|
Deferred compensation
|
|
|
(183
|
)
|
|
(567
|
)
|
|
(477
|
)
|
Prepaid expenses and other assets
|
|
|
260
|
|
|
84
|
|
|
910
|
|
Deferred revenue
|
|
|
46
|
|
|
(74
|
)
|
|
49
|
|
Other accrued liabilities
|
|
|
(131
|
)
|
|
(22
|
)
|
|
(395
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,552
|
|
|
2,435
|
|
|
626
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Expended for property and equipment additions
|
|
|
(1,156
|
)
|
|
(1,652
|
)
|
|
(122
|
)
|
Proceeds from trust investment
|
|
|
220
|
|
|
|
|
|
|
|
Proceeds from asset sales, net
|
|
|
|
|
|
|
|
|
186
|
|
Proceeds from cash surrender of insurance policy
|
|
|
|
|
|
531
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(936
|
)
|
|
(1,121
|
)
|
|
64
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Borrowings from line of credit
|
|
|
5,000
|
|
|
|
|
|
|
|
Repayments on line of credit
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
Proceeds from stock option exercises
|
|
|
41
|
|
|
39
|
|
|
|
|
Payment of insurance policy loan
|
|
|
|
|
|
(486
|
)
|
|
|
|
Payment of capital lease obligation
|
|
|
|
|
|
(60
|
)
|
|
(180
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
41
|
|
|
(507
|
)
|
|
(180
|
)
|
Net increase in cash and cash equivalents
|
|
|
657
|
|
|
807
|
|
|
510
|
|
Cash and cash equivalents at beginning of period
|
|
|
5,135
|
|
|
4,328
|
|
|
3,818
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
5,792
|
|
$
|
5,135
|
|
$
|
4,328
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the year for:
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
89
|
|
$
|
34
|
|
$
|
(9
|
)
|
Interest
|
|
$
|
3
|
|
$
|
|
|
$
|
13
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures included in accounts payable
|
|
$
|
53
|
|
$
|
291
|
|
$
|
|
|
See notes to consolidated financial statements.
26
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
Consolidated Statements of Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Outstanding
Shares
|
|
Common
Stock
|
|
Additional
Capital
|
|
Accumulated
Earnings
(Deficit)
|
|
Total
Shareholders
Equity
|
|
Balance as of January 2, 2010
|
|
|
4,984,674
|
|
|
498
|
|
|
25,598
|
|
|
(11,148
|
)
|
|
14,948
|
|
Common stock issued1,200 shares issued
|
|
|
1,200
|
|
|
|
|
|
3
|
|
|
|
|
|
3
|
|
Share based compensation expense
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
(2
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
(480
|
)
|
|
(480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2011
|
|
|
4,985,874
|
|
|
498
|
|
|
25,599
|
|
|
(11,628
|
)
|
|
14,469
|
|
Common stock issued34,011 shares issued
|
|
|
34,011
|
|
|
4
|
|
|
139
|
|
|
|
|
|
143
|
|
Share based compensation expense
|
|
|
|
|
|
|
|
|
388
|
|
|
|
|
|
388
|
|
Stock option exercises12,874 shares issued
|
|
|
12,874
|
|
|
1
|
|
|
38
|
|
|
|
|
|
39
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
3,294
|
|
|
3,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
|
5,032,759
|
|
$
|
503
|
|
$
|
26,164
|
|
$
|
(8,334
|
)
|
$
|
18,333
|
|
Common stock issued38,146 shares issued
|
|
|
38,146
|
|
|
4
|
|
|
176
|
|
|
|
|
|
180
|
|
Share based compensation expense
|
|
|
|
|
|
|
|
|
257
|
|
|
|
|
|
257
|
|
Stock option exercises13,250 shares issued
|
|
|
13,250
|
|
|
1
|
|
|
47
|
|
|
|
|
|
48
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
330
|
|
|
330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 29, 2012
|
|
|
5,084,155
|
|
$
|
508
|
|
$
|
26,644
|
|
$
|
(8,004
|
)
|
$
|
19,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
27
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of business
Analysts International Corporation ("AIC," "Company," "we," "us," or "our") is a national information technology ("IT") services
company with 11 U.S. office locations. We employ approximately 900 IT professionals, management and administrative staff and are focused on serving the IT needs of middle market to Fortune 500
companies and government agencies across North America. AIC was incorporated in Minnesota in 1966 and our corporate headquarters is located in Minneapolis, Minnesota.
Basis of presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts
and transactions have been eliminated in consolidation.
Fiscal year
Our fiscal year ends on the Saturday closest to December 31. References to fiscal years 2012, 2011 and 2010 refer to the fiscal
years ended December 29, 2012, December 31, 2011 and January 1, 2011, respectively. Fiscal years 2012, 2011 and 2010 all contain 52 weeks.
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Segment Reporting
The Company has two operating segments"staffing" (which consists of staff augmentation services, including managed teams)
and "solutions." Based on the guidance and criteria described in FASB ASC Topic 280,
Segment Reporting
("ASC 280"), we aggregate our staffing operating
segment and solutions operating segment into one reportable segment. The goal of our staffing operating segment is to provide high-quality supplemental staffing services to a broad range
of clients. The goal of our solutions operating segment is to provide a solution to the client in the form of developed software and services, technology products and staffing support services.
Fair value measurements
We follow the guidance of FASB ASC Topic 820,
Fair Value Measurements and Disclosures
herein referred to as ("ASC Topic 820") which:
-
-
defines fair value as the exchange price that would be received for an asset or paid to transfer a liability, or the exit
price, in an orderly transaction between market participants on the measurement date;
-
-
establishes a three level hierarchy for fair value measurements based upon the observability of the inputs to the
valuation of an asset or liability as of the measurement date;
28
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
-
-
requires that the use of observable inputs be maximized and the use of unobservable inputs be minimized; and
-
-
expands disclosures about instruments measured at fair value.
The
fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). A financial instrument's level within the hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The levels
of the fair value hierarchy are defined as follows:
Level 1Quoted
prices in active markets for identical assets or liabilities. The types of assets and liabilities included in Level 1 are highly liquid and actively traded
instruments with quoted market prices.
Level 2Observable
inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The type of assets and liabilities included in Level 2 are
typically either comparable to actively traded securities or contracts or priced with models using observable inputs.
Level 3Unobservable
inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The type of assets and
liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation.
We
also follow the guidance of FASB ASC Topic 825,
Financial Instruments
. This ASC permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. We did not elect the fair value measurement option for any items that are not already
required to be measured at fair value.
Cash equivalents
Short-term cash investments in money market accounts are considered to be cash equivalents. The Company will, on occasion,
enter into over-night sweep investments into money market accounts that are available within one business day. The estimated fair values for cash equivalents approximate their carrying values due to
the short-term maturities of these instruments. Accordingly, cash equivalents are classified as Level 1.
Equity compensation
FASB ASC Topic 718,
CompensationStock Compensation
herein referred to as
("ASC 718") requires us to recognize expense related to the fair value of our stock-based compensation awards. In accordance with ASC 718, the presentation of our consolidated statement of cash flows
will report the excess tax benefits from the exercise of stock options as financing cash flows. The Company had no such benefits to report in fiscal 2012.
29
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
Revenue recognition
We generally recognize revenue as services are performed.
We
periodically enter into fixed price engagements. When we enter into such an engagement, revenue is recognized over the life of the contract based on time and materials input to date
and estimated time and materials to complete the project. This method of revenue recognition relies on accurate estimates of the cost, scope, and duration of the engagement. If we do not accurately
estimate the resources required or the scope of the work to be performed, both prior and future revenues may be negatively affected or losses on contracts may need to be recognized. All future
anticipated losses are recognized in the period they are identified. There were no such material losses recorded in fiscal 2012, 2011 or 2010.
In
some cases, we provide permanent placement services for clients for a fee. When we provide such services, revenue is recognized when the candidate commences in the position.
Depreciation
Property and equipment is being depreciated using the straight-line method over the estimated useful lives of the assets
for financial statement purposes and accelerated methods for income tax purposes. See table below for estimated useful lives used in the financial statements.
|
|
|
|
|
Useful lives in years
|
Leasehold improvements
|
|
Shorter of useful life or lease term
|
Office furniture & equipment
|
|
5 - 10
|
Computer hardware
|
|
2 - 5
|
Software
|
|
2 - 5
|
Income Taxes
In accordance with FASB ASC Topic 740,
Income Taxes
("ASC 740"), we account for income
taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the
financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using
enacted tax rates in effect for the years in which the differences are expected to reverse.
We
record a valuation allowance to reduce our deferred tax assets to an amount we believe will more likely than not be realized. The Financial Accounting Standards Board guidance
requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence that can be objectively
verified. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, historical and projected future taxable
income, tax planning strategies and recent financial operations. Our three-year historical cumulative loss has been a significant negative factor in recent fiscal years in determining that
a valuation allowance on these assets continued to be appropriate.
30
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
As
of December 29, 2012, the Company was no longer in a three-year cumulative loss position. However, the realization of tax benefits of deductible temporary
differences and operating loss or tax credit carry-forwards will depend on whether we have sufficient taxable income of an appropriate character within the carry-back and carry-forward
periods permitted by the tax law to allow for utilization of the deductible amounts and carry-forwards. Significant management judgment is required in determining if a valuation allowance should
continue to be recorded against deferred tax assets. We evaluated our ability to recover the deferred tax assets and weighed all available positive and negative evidence based on its objectivity and
subjectivity. Such evidence included the lack of long-term, sustained positive operating results and trends, our ability to carry back losses against prior taxable income and uncertainty around
projections of future taxable income. In estimating future taxable income, we developed assumptions including the amount of future federal and state pre-tax operating income and the
reversal of temporary differences. These plans and projections require us to make estimates about a number of factors, including future revenues, prices, inflation, and expenses. Giving consideration
to all relevant facts and circumstances, we concluded that the weight of the positive evidence was not sufficient to overcome the negative evidence and have concluded it is appropriate to maintain a
full valuation allowance of $26.0 million against our deferred tax assets.
In
the event we were to determine that we would be able to realize a portion, or all, of our deferred income tax assets in the future in excess of their net recorded amount, we would
make an adjustment to the valuation allowance, which could materially impact our financial position and results of operations.
ASC
740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. ASC 740 also prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, ASC 740 provides guidance on
de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
We
file a consolidated income tax return in the US federal jurisdiction. We also file consolidated or separate company income tax returns in most states, Canada federal and
Ontario province. As of December 29, 2012, there was one state tax audit in progress. The financial assessment is not yet final; however, we estimate the financial impact to be approximately
$10,000 and it is provided for in our uncertain tax positions as of December 29, 2012. Aside from the aforementioned, there are no other federal, state or foreign income tax audits in progress.
We are no longer subject to US federal audits for tax years before 2009, and with few exceptions, the same for state and local audits.
We
account for our sales tax and any other taxes that are collected from our clients and remitted to governmental authorities on a net basis. The assessment, collection and payment of
these taxes are not reflected on our Consolidated Statement of Operations.
We
recognize interest and penalties related to uncertain tax positions within interest expense.
Net income (loss) per share
Basic and diluted net income (loss) per share is presented in accordance with FASB ASC Topic 260,
Earnings per Share
("ASC 260").
Basic income (loss) per share excludes dilution and is computed by dividing the income (loss) available to common
stockholders by the weighted average number of common shares outstanding for the period. Diluted income per share includes dilutive
31
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (Continued)
potential
common shares outstanding and is computed by dividing income available to common stockholders by the weighted-average number of common and common equivalent shares outstanding for the
period.
There
were approximately 271,000 and 320,000 anti-dilutive shares excluded from the calculation of weighted average number of common and common equivalent shares outstanding
for fiscal 2012 and fiscal 2011, respectively. For fiscal 2010, all potential common shares outstanding were considered anti-dilutive and excluded from the calculation of weighted average
number of common and common equivalent shares outstanding because we reported a net loss for that year. The computation of basic and diluted income (loss) per share for fiscal 2012, 2011 and 2010 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
(In thousands except per share amounts)
|
|
2012
|
|
2011
|
|
2010
|
|
Net income (loss)
|
|
$
|
330
|
|
$
|
3,294
|
|
$
|
(480
|
)
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
5,071
|
|
|
5,012
|
|
|
4,986
|
|
Dilutive effect of equity compensation awards
|
|
|
31
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common and common equivalent shares outstanding
|
|
|
5,102
|
|
|
5,027
|
|
|
4,986
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
$
|
0.66
|
|
$
|
(0.10
|
)
|
Diluted
|
|
$
|
0.06
|
|
$
|
0.66
|
|
$
|
(0.10
|
)
|
Significant clients
International Business Machines ("IBM") and Chevron are our most significant clients. Our IBM and Chevron business accounted for
approximately 7%, 7% and 11% and 14%, 11% and 9%, respectively, of our total revenue for fiscal years 2012, 2011 and 2010.
Accounting Pronouncements
There have been no new accounting pronouncements issued or changes to existing pronouncements during the fiscal year ended
December 29, 2012 that did or are expected to have a material impact on our financial results.
2. Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets for financial statement purposes and
accelerated methods for
32
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Property and Equipment (Continued)
income
tax purposes. The balances of our property and equipment as of December 29, 2012 and December 31, 2011 and the estimated useful lives used in the financial statements are as
follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
Useful lives in years
|
Leasehold improvements
|
|
$
|
204
|
|
$
|
247
|
|
Shorter of useful life or lease term
|
Office furniture & equipment
|
|
|
1,672
|
|
|
1,808
|
|
5 - 10
|
Computer hardware
|
|
|
1,247
|
|
|
1,569
|
|
2 - 5
|
Software
|
|
|
6,499
|
|
|
4,574
|
|
2 - 5
|
Work in process
|
|
|
236
|
|
|
1,432
|
|
|
|
|
|
|
|
|
|
|
|
|
9,858
|
|
|
9,630
|
|
|
Accumulated depreciation
|
|
|
(7,492
|
)
|
|
(7,535
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
2,366
|
|
$
|
2,095
|
|
|
|
|
|
|
|
|
|
In
the third quarter of fiscal 2011, the Company commenced a project to replace its current financial and human resource information systems with a fully integrated Enterprise Resource
Planning ("ERP") system. The project to implement the ERP system resulted in approximately $1.5 million of costs being capitalized in fiscal 2011. During fiscal 2012, the Company capitalized an
additional $0.7 million of costs related to the ERP system which are included in software and work in process at December 29, 2012.
In
the second and third quarters of fiscal 2011, the Company disposed of approximately $1.4 million of fully amortized and depreciated property and equipment. The disposed property and
equipment primarily related to decommissioned software, computer hardware and the relocation of our corporate headquarters. These disposals did not result in any gain or loss.
3. Financing Agreements
Revolving Credit Facility
On February 23, 2011, we entered into the First Amendment to Credit and Security Agreement ("Amended Credit Facility") with
Wells Fargo Bank, National Association ("Wells Fargo"), pursuant to which the interest rate on future borrowings and the unused line fee were reduced, the maturity date was extended until
September 30, 2014 and certain covenants were made less restrictive. On September 21, 2011, we entered into the Second Amendment to the Amended Credit Facility with Wells Fargo, which
increased our annual capital expenditures covenant for fiscal 2011 from
$2.0 million to $2.5 million. On February 22, 2012, we entered into the Third Amendment to the Amended Credit Facility ("Third Amendment") with Wells Fargo. The Third Amendment
increased the total availability of the Amended Credit Facility, which fluctuates based on our level of eligible accounts receivable, by approximately $4.0 million. In addition, the Third
Amendment increased our minimum trailing twelve months earnings before taxes financial covenant from a loss of $0.8 million to earnings of $0.25 million. Finally, the Third Amendment
added an additional financial covenant which will require us to maintain a minimum excess borrowing base availability of not less than $3.0 million for each reporting period in fiscal 2012 and
thereafter. On February 20, 2013, we entered into the Fourth Amendment to the Amended Credit Facility ("Fourth Amendment") with Wells Fargo. The Fourth Amendment adjusted certain collateral
borrowing base calculations associated with our eligible unbilled accounts receivable and is expected to increase our borrowing availability in periods in which our fiscal period ends prior to
33
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Financing Agreements (Continued)
the
calendar month end, which affects our unbilled accounts receivable levels for clients on a calendar month billing cycle. In addition, the Fourth Amendment extended the term of Amended Credit
Facility from September 30, 2014 to September 30, 2016. Finally, the Fourth Amendment adjusted our minimum trailing twelve months earnings before taxes financial covenant to a loss of
$0.1 million for the period ending March 30, 2013, a loss of $0.3 million for the period ending June 29, 2013 and earnings of $0.25 million for periods thereafter
through the expiration of the credit agreement ending on September 30, 2016.
Under
the Amended Credit Facility, Wells Fargo will continue to advance up to $15.0 million to us for working capital purposes and to facilitate the issuance of letters of credit.
The total amount available for borrowing under the Amended Credit Facility will fluctuate based on our level of eligible accounts receivable.
The
Amended Credit Facility carries an interest rate equal to the three-month LIBOR rate plus 1.50%-2.50%.depending on our operating results. The credit facility had a
one-time origination fee of $150,000, the balance of which is being amortized over the new term of the Amended Credit Facility. The annual unused line fee varies between
0.25%-0.375%, depending on our operating results, and is based on the daily average unused amount. The interest rate effective at the end of fiscal year 2012 was 2.375% and the unused line
fee rate was 0.25%. The maturity date of the Amended Credit Facility is September 30, 2016 and may be terminated or reduced by us on 90 days notice in exchange for a termination fee of
0.25% of the maximum line amount or reduction of the maximum line amount through September 30, 2015 and no fee in the final year of the agreement ending on September 30, 2016. Borrowings
under the Amended Credit Facility are secured by all of our assets.
The
Amended Credit Facility requires us to meet certain levels of trailing twelve months earnings before taxes. For fiscal 2012, we were required to exceed minimum trailing twelve months
earnings
before taxes of $0.25 million. For fiscal 2011, we were required to exceed a minimum trailing twelve months loss before taxes of $0.8 million. Additionally, the Amended Credit Facility
limit on our annual capital expenditures was $2.5 million in fiscal 2011 and $2.0 million for each fiscal year thereafter. In fiscal 2012, we were required to maintain a minimum excess
borrowing base availability of not less than $3.0 million. The Amended Credit Facility contains customary affirmative covenants, including covenants regarding annual, quarterly and projected
financial reporting requirements, collateral and insurance maintenance, and compliance with applicable laws and regulations. Further, the facility contains customary negative covenants limiting our
ability to grant liens, incur indebtedness, make investments, repurchase our stock, create new subsidiaries, sell assets or engage in any change of control transaction without the consent of Wells
Fargo.
Upon
an event of default, Wells Fargo may terminate the facility or declare the entire amount outstanding under the facility to be immediately due and payable and exercise other rights
under the agreement. The events of default under the facility include, among other things, payment defaults, breaches of covenants, a change in control of the Company and bankruptcy events.
As
of December 29, 2012, we were in compliance with all the requirements and had no borrowings under the Amended Credit Facility. Total availability of the Amended Credit
Facility, which fluctuates based on our level of eligible accounts receivable, was $10.9 million as of December 29, 2012.
34
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Restructuring Costs and Other Severance Related Costs
A summary of the restructuring charges and subsequent activity in the restructuring accrual accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Workforce
Reduction
|
|
Office Closure/
Consolidation
|
|
Total
|
|
Balance as of January 2, 2010
|
|
|
1,215
|
|
|
1,868
|
|
|
3,083
|
|
Restructuring charges (reversals)
|
|
|
413
|
|
|
(713
|
)
|
|
(300
|
)
|
Cash expenditures
|
|
|
(1,606
|
)
|
|
(671
|
)
|
|
(2,277
|
)
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2011
|
|
|
22
|
|
|
484
|
|
|
506
|
|
Restructuring charges
|
|
|
370
|
|
|
399
|
|
|
769
|
|
Cash expenditures
|
|
|
(213
|
)
|
|
(592
|
)
|
|
(805
|
)
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
$
|
179
|
|
$
|
291
|
|
$
|
470
|
|
Restructuring charges
|
|
|
113
|
|
|
|
|
|
113
|
|
Cash expenditures
|
|
|
(292
|
)
|
|
(291
|
)
|
|
(583
|
)
|
|
|
|
|
|
|
|
|
Balance as of December 29, 2012
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
During
fiscal 2012, we recorded severance charges of $0.1 million related to changes in our senior executive officers. As of December 29, 2012, we have made all remaining
restructure related payments and no future costs or payments are expected at this time.
During
fiscal 2011, we recorded severance and office closure charges of $0.8 million. Of these charges, $0.4 million related to severance and severance-related charges for
changes in our senior executive officers and $0.4 million related to the relocation of our corporate headquarters.
During
fiscal 2010, we recorded a net reversal of restructuring costs and other severance-related costs of $0.3 million. The net reversal is comprised of a $0.4 million
charge relating to severance and severance-related expenses and a reversal of $0.7 million primarily relating to the modification of lease agreements for office space previously vacated.
5. Deferred Compensation
The Restated Special Executive Retirement Plan (the "Deferred Plan") is an unfunded deferred compensation plan for past and present AIC executives. The Deferred Plan calls for us to
credit periodically all existing account balances at a rate equivalent to the 10-year treasury rate plus one to three percent as determined each year by our Board of Directors. Previously,
the Deferred Plan credited active executives' accounts at an agreed upon percentage of base pay; however, these contributions were discontinued effective January 3, 2010. Active executives,
however, can continue to contribute up to fifty percent of their annual base pay and one hundred percent of their incentive bonus, if any. Previous employer accruals and employee contributions are one
hundred percent vested at all times. Additionally, the Deferred Plan allows for discretionary employer contributions with separate vesting schedules if approved by our Board of Directors. Participants
are allowed to choose between a lump sum distribution or one hundred twenty months of payments and a date of distribution for employee and employer contributions, subject to the "one-year,
five-year" rule and other deferred compensation rules issued by the Internal Revenue Service. Key employees are not allowed to take distribution for six months after separation from
service. Hardship distributions from the Deferred Plan are not allowed, and deferral elections will be canceled following any participant's hardship distribution
35
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Deferred Compensation (Continued)
from
his or her 401(k) account. The Deferred Plan provides that upon a change in control, a rabbi trust will be funded, and payments will be made if the Deferred Plan is subsequently terminated within
twelve months of a change in control or due to a participant's right to take distribution upon a separation from service.
During
fiscal 2011, we required the participants in our post-retirement medical benefit plan to move to a standardized plan or accept a buyout, which resulted in a decline in
our future benefit obligation of approximately $0.4 million. The liability balance for our expected future
post-retirement medical benefits is recorded in our non-current Deferred compensation balance as reported in our Consolidated Balance Sheets.
As
of December 29, 2012 and December 31, 2011, our liability to active and former employees under the Deferred Plan, post-retirement medical benefits and other
deferred compensation arrangements was $0.3 million and $0.5 million, respectively. Deferred compensation expense for fiscal 2012, 2011 and 2010 was $2,000, $19,000, and $42,000,
respectively.
6. Income Taxes
The provision for income tax expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
(In thousands)
|
|
2012
|
|
2011
|
|
2010
|
|
Currently payable:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
|
|
$
|
|
|
State
|
|
|
68
|
|
|
42
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
42
|
|
|
4
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
651
|
|
|
1,369
|
|
|
(44
|
)
|
State
|
|
|
96
|
|
|
201
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
747
|
|
|
1,570
|
|
|
(51
|
)
|
Valuation allowance for deferred tax assets
|
|
|
(747
|
)
|
|
(1,570
|
)
|
|
51
|
|
|
|
|
|
|
|
|
|
Deferred provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
68
|
|
$
|
42
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
36
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Income Taxes (Continued)
Net
deferred tax assets (liabilities) are comprised of the following:
|
|
|
|
|
|
|
|
(In thousands)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
Federal net operating loss carry forward
|
|
$
|
22,671
|
|
$
|
22,675
|
|
State net operating loss carry forwards
|
|
|
2,206
|
|
|
2,696
|
|
Depreciation
|
|
|
1,230
|
|
|
1,243
|
|
Goodwill and other intangible assets
|
|
|
165
|
|
|
265
|
|
Deferred compensation
|
|
|
106
|
|
|
174
|
|
Other
|
|
|
(334
|
)
|
|
(262
|
)
|
Valuation allowance
|
|
|
(26,044
|
)
|
|
(26,791
|
)
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
|
|
$
|
|
|
Non-current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
We
record a valuation allowance to reduce our deferred tax assets to an amount we believe will more likely than not be realized. The Financial Accounting Standards Board guidance
requires that companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence that can be objectively
verified. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, historical and projected future taxable
income, tax planning strategies and recent financial operations. Our three-year historical cumulative loss has been a significant negative factor in recent fiscal years in determining that
a valuation allowance on these assets continued to be appropriate.
As
of December 29, 2012, the Company was no longer in a three-year cumulative loss position. However, the realization of tax benefits of deductible temporary
differences and operating loss or tax credit carry-forwards will depend on whether we have sufficient taxable income of an appropriate character within the carry-back and carry-forward
periods permitted by the tax law to allow for utilization of the deductible amounts and carry-forwards. Significant management judgment is required in determining if a valuation allowance should
continue to be recorded against deferred tax assets. We evaluated our ability to recover the deferred tax assets and weighed all available positive and negative evidence based on its objectivity and
subjectivity. Such evidence included the lack of long-term, sustained positive operating results and trends, our ability to carry back losses against prior taxable income and uncertainty around
projections of future taxable income. In estimating future taxable income, we developed assumptions including the amount of future federal and state pre-tax operating income and the
reversal of temporary differences. These plans and projections require us to make estimates about a number of factors, including future revenues, prices, inflation, and expenses. Giving consideration
to all relevant facts and circumstances, we concluded that the weight of the positive evidence was not sufficient to overcome the negative evidence and have concluded it is appropriate to maintain a
full valuation allowance of $26.0 million against our deferred tax assets.
As
of December 29, 2012, we had a tax benefit from the federal and state net operating loss carry-forwards of approximately $22.7 million and $2.2 million,
respectively. The federal net operating loss carry forward benefits of $3.3 million, $1.1 million, $1.7 million, $3.6 million, $11.1 million, $1.6 million,
37
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Income Taxes (Continued)
$0.1 million
and $0.2 million expire in 2025, 2026, 2027, 2028, 2029, 2030, 2031, and 2032, respectively. The state net operating loss carry-forward benefits expire as follows:
$0.7 million in 2013 through 2020 and $1.5 million in 2021 and beyond.
The
provision for income taxes differs from the amount of income tax determined by applying the federal statutory income tax rates to pretax (loss) income as a result of the following
differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
(In thousands)
|
|
2012
|
|
2011
|
|
2010
|
|
Income tax (benefit) at statutory federal rate
|
|
$
|
135
|
|
$
|
1,120
|
|
$
|
(157
|
)
|
State and local taxes, net of federal (benefit)
|
|
|
36
|
|
|
189
|
|
|
(20
|
)
|
Valuation allowance for deferred tax assets
|
|
|
(747
|
)
|
|
(1,570
|
)
|
|
51
|
|
Meals and entertainment
|
|
|
80
|
|
|
50
|
|
|
53
|
|
Goodwill
|
|
|
(22
|
)
|
|
(22
|
)
|
|
(22
|
)
|
Expired state net operating loss deductions
|
|
|
434
|
|
|
217
|
|
|
187
|
|
State income tax expense
|
|
|
68
|
|
|
42
|
|
|
4
|
|
Other
|
|
|
84
|
|
|
16
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
Total tax provision
|
|
$
|
68
|
|
$
|
42
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
The
provisions of ASC 740 clarify the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribe a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, ASC 740 provides guidance on
de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of December 29, 2012, we determined our positions will more
likely than not be sustained if challenged.
We
recognize interest and penalties related to uncertain tax positions within interest expense. During fiscal years 2012, 2011 and 2010, we have not recognized expense for interest and
penalties and do not have any amounts accrued as of December 29, 2012 and December 31, 2011, respectively, for the payment of interest and penalties.
We
file a consolidated income tax return in the US federal jurisdiction. We also file consolidated or separate company income tax returns in most states, Canada federal and
Ontario province. As of December 29, 2012, there was one state tax audit in progress. The financial assessment is not yet final; however, we estimate the financial impact to be approximately
$10,000, and it is provided for in our uncertain tax positions as of December 29, 2012. Aside from the aforementioned, there are no other federal, state or foreign income tax audits in
progress. We are no longer subject to US federal audits for tax years before 2009, and with few exceptions, the same for state and local audits.
7. Equity
Equity Compensation Plans
Currently, we have equity based options outstanding from five plans and have the ability to issue equity-based options from three of
these plans. Under the 2000 Stock Option Plan, we may grant non-qualified options to our employees for up to 34,000 shares of common stock. Under the 2004 Equity Incentive Plan, we may
grant incentive options, non-qualified options or restricted stock awards
38
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Equity (Continued)
to
our employees and non-qualified options or restricted stock awards to our Board of Directors for up to 56,000 shares of common stock. Under the 2009 Equity Incentive Plan, we may grant
incentive options to our employees and may award non-qualified options, restricted stock and other stock awards, restricted stock units, stock appreciation rights, performance share awards
and other stock awards to our Board of Directors and non-employee consultants for up to 283,000 shares of common stock. We also have options outstanding under the 1996 Stock Option Plan
for Non-Employee Directors and the 1999 Stock Option Plan.
The
maximum term for options is 10 years; the exercise price of each option is equal to the closing market price of our stock on the date of grant; and the options and awards
become exercisable or vest in one of two vesting schedules that comprise nearly all of the current outstanding options. The first
vesting schedule is in annual increments of 25% beginning one year after the grant date and the second schedule is to vest 25% of the option awards immediately and 25% each year thereafter, beginning
one year after the date of grant. Upon the exercise of stock options or the vesting of awards, new shares are issued from the authorized, unissued common stock.
The
following table summarizes the stock option activity for the fiscal year ended December 29, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Weighted Average
Remaining
Contractual Term
(in years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding on December 31, 2011
|
|
|
314,700
|
|
$
|
5.11
|
|
|
7.75
|
|
$
|
436,774
|
|
Granted
|
|
|
88,800
|
|
|
5.16
|
|
|
|
|
|
|
|
Exercised
|
|
|
(13,250
|
)
|
|
3.60
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(54,600
|
)
|
|
4.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on December 29, 2012
|
|
|
335,650
|
|
$
|
5.31
|
|
|
7.26
|
|
$
|
34,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 29, 2012
|
|
|
311,220
|
|
$
|
5.36
|
|
|
7.13
|
|
$
|
32,958
|
|
Exercisable on December 29, 2012
|
|
|
207,599
|
|
$
|
5.80
|
|
|
6.42
|
|
$
|
24,169
|
|
The
total fair value of the options that vested during 2012 was $0.2 million. The total intrinsic value of options exercised (which is the amount by which the stock price exceeded
the exercise price of the options on the date of exercise) was approximately $30,000 for fiscal 2012, $23,000 for fiscal 2011, and $0 for fiscal 2010.
39
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Equity (Continued)
The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option pricing model. The weighted average grant date fair value of stock options
granted during fiscal years 2012, 2011 and 2010 was $3.17, $2.66, and $1.73, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Black-Scholes Option Valuation Assumptions(1)
|
|
December 29, 2012
|
|
December 31, 2011
|
|
January 1, 2011
|
|
Risk-free interest rate(2)
|
|
|
0.2 - 2.0
|
%
|
|
0.1 - 2.0
|
%
|
|
0.3 - 3.4
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
Expected stock price volatility(3)
|
|
|
50.7 - 89.4
|
|
|
65.4 - 96.6
|
|
|
76.4 - 104.9
|
|
Expected life of stock options (in years)(4)
|
|
|
4.1
|
|
|
4.1
|
|
|
4.1
|
|
-
(1)
-
Forfeitures
are estimated and based on historical experience.
-
(2)
-
Based
on the U.S. Treasury zero-coupon bond with a term consistent with the expected life of the options.
-
(3)
-
Expected
stock price volatility is based on historical experience.
-
(4)
-
Expected
life of stock options is based upon historical experience.
Approximately
13,000 options were exercised during fiscal years 2012 and 2011. No options were exercised during fiscal 2010. The actual income tax benefit realized from stock option
exercises was $0 in fiscal years 2012, 2011 and 2010.
Total
stock option expense included in our Consolidated Statements of Operations for the fiscal year 2012, 2011 and 2010 was $0.2 million, $0.2 million, and $0,
respectively. The tax benefit recorded for the same periods was $11,000, $12,000, and $0, respectively. This tax benefit is offset against our valuation allowance for our deferred tax assets.
As
of December 29, 2012, there was $0.1 million of unrecognized compensation expense related to unvested option grants that were expected to vest over a weighted average period of
one year.
Stock Awards
In fiscal 2012, we granted 80,000 stock awards to our employees, of which 25% vested immediately and 25% each year thereafter,
beginning one year after the date of grant. The fair value of each stock award is equal to the closing price of our stock as measured on the grant date.
In
addition, annually on or about the first business day of the fiscal year, each of the non-chair independent members of the Board of Directors is awarded 200 shares of
fully vested common stock, and our independent board chair is awarded 400 shares of fully vested common stock.
40
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Equity (Continued)
The
following table summarizes the stock award activity for fiscal 2012:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Non-vested at December 31, 2011
|
|
|
88,126
|
|
$
|
4.24
|
|
Granted
|
|
|
81,200
|
|
|
5.10
|
|
Vested
|
|
|
(44,322
|
)
|
|
(4.79
|
)
|
Forfeited
|
|
|
(26,251
|
)
|
|
(3.96
|
)
|
|
|
|
|
|
|
Non-vested at December 29, 2012
|
|
|
98,753
|
|
$
|
4.78
|
|
|
|
|
|
|
|
Total
stock award expense included in our Consolidated Statements of Operations for the fiscal years 2012, 2011 and 2010 was $0.3 million, $0.3 million, and $0, respectively. The tax
benefit recorded for the same periods was $30,000, $54,000, and $0, respectively. This tax benefit is offset against our valuation allowance for our deferred tax assets.
The
total fair value of stock awards that vested during fiscal years 2012, 2011, and 2010 was approximately $197,000, $143,000, and $4,000, respectively.
As
of December 29, 2012, there was $0.2 million of unrecognized compensation expense related to unvested stock awards that were expected to vest over a weighted average period of
one year.
Reverse Stock Split
On February 26, 2010, we amended our Articles of Incorporation to effect a one-for-five reverse stock
split (the "Reverse Stock Split") of our common stock, par value $0.10 per share (the "Common Stock"). As a result of the Reverse Stock Split, every five shares of our Common Stock were automatically
converted into one share of our Common Stock immediately prior to the opening of trading on March 1, 2010. All fractional shares were rounded down and any shareholder that would be entitled to
receive a fractional share would be paid the fair market value of the fractional share in cash.
To
reflect the effect of the Reverse Stock Split, we have retroactively adjusted all share and per share data included in Common Stock and Additional Capital amounts in our Consolidated
Balance Sheets as of January 2, 2010 and the weighted-average shares outstanding in our Consolidated Statements of Operations and related disclosures for the periods presented.
The
Reverse Stock Split also resulted in proportionate adjustments under our then-existing Amended and Restated Rights Agreement having an effective date of
February 27, 2008 (the "Amended Rights Plan") in (a) the number of shares issuable under the Amended Rights Plan and (b) the Purchase Price.
Amended Rights Plan
Under our common stock shareholder rights plan, the Board of Directors declared a dividend of one common share purchase right for each
outstanding share of common stock and stock options granted and available for grant. The rights, which were extended by the Board of Directors on February 26, 2008 to expire on
February 27, 2018, are exercisable only under certain conditions, and when exercisable the holder will be entitled to purchase from us one share of common stock at a price
41
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Equity (Continued)
of
$30.00, subject to certain adjustments. The rights will become exercisable after a person or group acquires beneficial ownership of 15% or more of our common stock or after a person or group
announces an offer, the consummation of which would result in such person or group owning 15% or more of the common stock.
If
we are acquired at any time after the rights become exercisable, the rights will be adjusted so as to entitle a holder to purchase a number of shares of common stock of the acquiring
company equal to $30.00 divided by one-half the then-current market price of the acquirer's stock for each right owned by a holder. If any person or group acquires beneficial
ownership of 15% or more of our shares, the rights will be adjusted so as to entitle a holder (other than such person or group whose rights become void) to purchase a number of shares of common stock
of Analysts International Corporation equal to $30.00 divided by one-half the then-current market price of Analysts International Corporation's common stock or the Board of
Directors may exchange the rights, in whole or in part, at an exchange ratio of one common share per right (subject to adjustment).
At
any time prior to an acquisition by a person or group of beneficial ownership of 15% or more of our shares, the Board of Directors may redeem the rights at $.001 per right.
8. Commitments
As of December 29, 2012, aggregate net minimum lease commitments under non-cancelable operating leases having an initial or remaining term of more than one year are
payable as follows:
|
|
|
|
|
(In thousands)
|
|
Lease Commitments
|
|
Fiscal year ending
|
|
|
|
|
2013
|
|
$
|
1,388
|
|
2014
|
|
|
1,078
|
|
2015
|
|
|
969
|
|
2016
|
|
|
831
|
|
Later
|
|
|
3,873
|
|
Less: sublease contracts
|
|
|
307
|
|
|
|
|
|
Total minimum obligation
|
|
$
|
7,832
|
|
|
|
|
|
Rent
expense, primarily for office facilities, for fiscal 2012, 2011 and 2010 was $1.0 million, $1.2 million, and $1.4 million, respectively.
We
have compensation arrangements with our corporate officers and certain other key employees which provide for certain payments in the event of a change of control of the Company.
We
also sponsor a 401(k) plan. Substantially all employees are eligible to participate and may contribute up to 50% of their pre-tax earnings, subject to Internal Revenue
Service maximum annual contribution amounts. Beginning in September 2009, we ceased making matching contributions to employees' pre-tax contributions. Prior to this change, after one year
of employment, we made matching contributions for non-highly compensated participants in the form of Company stock of 18% of a participant's first 15% of pre-tax contributions.
Matching contributions vest at the rate of 20% per year and are fully vested after five years of service.
42
Table of Contents
ANALYSTS INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Subsequent Event
On February 20, 2013, we entered into the Fourth Amendment to the Amended Credit Facility ("Fourth Amendment") with Wells Fargo. The Fourth Amendment adjusted certain collateral
borrowing base calculations associated with our eligible unbilled accounts receivable and is expected to increase our borrowing availability in periods in which our fiscal period ends prior to the
calendar month end, which affects our unbilled accounts receivable levels for clients on a calendar month billing cycle. In addition, the Fourth Amendment extended the term of the Amended Credit
Facility from September 30, 2014 to September 30, 2016. Finally, the Fourth Amendment adjusted our minimum trailing twelve months earnings before taxes financial covenant to a loss of
$0.1 million for the period ending March 30, 2013, a loss of $0.3 million for the period ending June 29, 2013 and earnings of $0.25 million for periods thereafter through the expiration
of the credit agreement ending on September 30, 2016.
43
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
Analysts International Corporation
Minneapolis, Minnesota
We
have audited the accompanying consolidated balance sheets of Analysts International Corporation and subsidiaries (the "Company") as of December 29, 2012 and December 31,
2011, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years ended December 29, 2012, December 31, 2011, and
January 1, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Analysts International Corporation and subsidiaries as of
December 29, 2012 and December 31, 2011, and the results of their operations and their cash flows for each of the three years ended December 29, 2012, December 31, 2011,
and January 1, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Minneapolis,
Minnesota
February 21, 2013
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